Morgan Stanley Research on Wednesday realised its report titled India Economics – Macro Indicators.
Consumption indicators, particularly discretionary spending (e.g., consumer durables output), have remained weak. Within investment, for the quarter ended June, private projects under implementation declined on a YoY basis while public projects remained steady.
GDP growth has already been 5% for the last three quarters. GDP growth is expected to remain below 5% for the three more quarters. Over the next 6-9 months, domestic demand is expected to remain constrained by rise in real rates. A meaningful recovery in private capex or consumption in the next six months will be difficult considering the recent pro-cyclical tightening in monetary policy and adjustment needed in current account deficit, Morgan Stanley Research said.
CPI inflation remained high at 9.5% in August compared with 9.6% in July. While WPI inflation has decelerated from its peak, CPI inflation remains high. The trend in inflation expectations is better represented by CPI inflation in this cycle, and thus CPI inflation, which has started to decelerate, albeit at a slow pace. CPI inflation is expected to moderate at a slow pace over the next three to four months due to (i) lower food prices because of better farm output helped by good monsoon and lower increases in minimum support prices (MSP), (ii) deceleration in rural wages and (iii) slower growth in domestic demand. We expect CPI inflation to decelerate to around 7% by Sep-14.
Export growth continued to accelerate in August. Export growth accelerated to 13% YoY in August after increasing by 12% in July. On a seasonally adjusted basis, exports increased by 4.6% MoM in Aug-13 vs. an increase of 12.2% in July. Exports have now increased on a monthly seasonally adjusted basis for the second consecutive month since Feb-13.
Interest rates both at the short and long ends remained elevated following RBI’s tightening measures. On liquidity conditions, the report said inter-bank liquidity deficit has tightened in September with net liquidity deficit at US$16.1bn average in month to date vs. US$12.4bn last month and US$ 8.9bn in Sep-12.
RBI’s tightening measures in July lifted the short term rates to 10.25%-10.5%. Subsequent easing on September 20 has brought short-term rates lower to 9.5%. However, they are still significantly higher than the 7.25% in the first half of July before RBI initiated the tightening measures.
Trade Deficit declined in August due to better exports and gold import curbs. The trade deficit for August narrowed to US$10.9bn (7.3% of GDP annualized) compared to US$12.27bn (8.1% of GDP annualized) in July, led by better exports and decline in gold imports due to government curbs and partly on account of seasonal factors. Indeed trade deficit declined by 23% YoY in August vs. a decline of 29.8% in July.
Fiscal deficit remains higher than budgeted and stood at 62.8% of budget estimate (BE) in Apr-July vs.51.5% of BE in same period last year. In the current fiscal year expenditure growth has accelerated to 19.2% YoY ahead of BE of 18.2% YoY. On the other hand, gross tax collection grew by 6.5% YoY, lagging the BE of 19.2%YoY. Indeed, fiscal deficit on a 12-month trailing basis has risen to 5.4% of GDP in Jul 2013 vs. 4.9% of GDP in Mar-13.
Rail freight and sea port traffic growth accelerated in August.
Rural agriculture sector wages continue to show signs of moderation, although they are still high. Rural farm wage growth decelerated to 15.8% YoY for the three months ended July-13 from the peak rate of 22% during the three months ended October 2011.
Residential new sales / launches picked up in QE Jun-13, although the absorption rate weakened further.
WPI inflation rose to a six-month high in August, led by food prices (vegetable and eggs, meat). WPI inflation accelerated to 6.1% in August from 5.8% in previous month, primarily led by higher food prices. Indeed, WPI inflation has remained above the comfort zone of the RBI of 5-5.5% over the last two months. Inflation as measured by the CPI index, which we believe is more important, decelerated only marginally to 9.5% in August vs. 9.6% in previous month with non-food inflation remaining sticky at 8%. Old CPI (IW) inflation decelerated to 10.8% YoY in July vs. 11.1% in June, Morgan Stanley Research added.
Private projects under implementation declined on YoY basis in QE June to a new low. Engineering & construction companies order inflows slowed in QE Jun-13. Other capex-related indicators (cement, commercial vehicles) remained weak in August.
Even as we expect saving to rise and investment to slow over the next 12 months, current account will still be in deficit (i.e., India will still be saving short). Hence, US real rates/US dollar trend will continue to be the key driver of domestic real rates. In conclusion, we believe that rise in real rates in India will be inevitable considering the outlook on US real rates and US dollar, Morgan Stanley said.
The key to risk asset performance will be the government’s policy reforms to reverse distortions in price of land, labour and improving productivity dynamic and acceleration of GDP growth with support of a rise in investment to GDP. This will be critical to bring back the virtuous loop of much higher real GDP growth over real interest rates.